Joseph "Joe" Guay is a partner in our New York office.
Jennivere L. Kenlon is an Associate in our New York office.

As hotels seek to expand their customer bases during these difficult economic times, one potential source of income and customers has been the rather prolific growth in gift card sales. A visit to your local pharmacy or grocery store will show you that everyone is getting into the gift card game – restaurants, retailers, hotel companies, gas stations and more. Sales in 2008 alone totaled approximately $90 billion.

A Gift That Often Gives More

For hotel companies, when someone purchases or gives a hotel gift card, it creates an opportunity to attract a new or returning customer to spend money at a hotel. Because most hotel gift cards have a denomination of at least $50, this often means that the customer will go to the hotel to use the gift card, but end up spending more either for guestrooms, dining or amenities. However, implementing these programs requires careful consideration of both state and federal laws – which are complicated, sometimes inconsistent but necessary to understand in order to avoid fines and penalties for improperly designed programs.

A Gift With Some Strings Attached

Each state has previously been left to regulate the practices of gift card issuers within its jurisdiction. Only 12 states do not currently regulate gift card practices. The remaining states typically address the aspects of gift card sales which affect the value of a gift card over time: service fees, charges and dormancy penalties; expiration dates; redemption requirements; escheatment of "abandoned" gift cards; and the exemption of certain types of gift cards from regulation.

It has been long-rumored that Congress would eventually weigh in on these issues and set a baseline for required sales and disclosure practices. In the wake of growing consumer frustration with unclear or undisclosed terms of credit cards, gift cards and other electronic payment products, in May 2009 Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the "Card Act"). Although the Card Act deals primarily with the regulation of credit card practices, the inclusion of specific gift card regulations marks the first time Congress has addressed the gift card industry directly.

Under the Card Act, gift cards may not impose dormancy fees, inactivity charges or fees, or service fees unless the terms of these fees are clearly disclosed to the consumer prior to the sale of the gift card and the card has been inactive for over 12 months. Regulations will be issued by the Federal Reserve Board of Governors by February 22, 2010, regarding permitted fees for both "active" and "dormant" gift cards. Additionally, the Card Act prohibits all expiration dates, unless the expiration date is five years or more from the date of issuance, and requires that if an expiration date is imposed, that the terms are clearly and conspicuously stated. The gift card provisions of the Card Act will go into effect August 22, 2010.

The Card Act preempts existing state laws to the extent that those laws are inconsistent with the provisions of the Card Act. However, a state law is not considered inconsistent if it affords greater, albeit different, protections than the Card Act. As you can probably imagine, it is necessary to understand each state's laws on this issue in order to properly implement a gift card program in accordance with the applicable laws of both the state and the Card Act. The difficulty in making this determination arises from the fact that the states have a patchwork of differing laws that span a number of areas of the law (consumer protection laws, escheat laws, etc.) that must be evaluated for gift card program compliance purposes. Furthermore, as many gift cards are sold and used in multiple states, one must also make a conflicts of law evaluation to determine which state's laws will govern a particular issue.

A Look At California's Gift Card Laws

By way of example, a look at California's gift card laws show some of the considerations that must be made in evaluating the sale and use of gift cards in California – a state that is well known to have very strong consumer protection laws – and its gift card regulations are stricter than all state regimes except Connecticut, New Hampshire and Virginia.

As one can see from the above analysis of California's gift card laws, there are a number of laws and factors to be considered in determining whether one's gift card program is legally compliant. Many state legislatures will have to amend their gift card laws in order to become compliant by the time the Card Act takes effect in August of 2010. In fact, the State of New York, in an effort led by U.S. Senator Charles Schumer, a long-time supporter of credit and gift card reform, is considering a "rush" assimilation of its gift card law to the Card Act, pushing new legislation to fast track the implementation of the new rules so they go in to effect December 1, 2009.

A Fragmented Legal Framework

In addition to the risks associated with implementing a compliant gift card program, an increasingly problematic area that issuers of gift cards are faced to deal with involves the question of what to do with unused gift card balances. As described above, some states have addressed this issue through their unclaimed property and other gift card laws. However, with a number of states increasingly finding themselves in need of additional revenues (because of the economy and decreasing tax revenues), many are looking to that unused portion of the $90 billion a year gift card industry to fatten their coffers. Some states have already taken action against the gift card industry (including New York, Connecticut, Massachusetts and Maine). In these suits (often brought by the State's Attorney General offices as most states lack a private right of action for gift card laws), the states rely on their unclaimed property laws to claim that all or a portion of the unused gift cards are property that should escheat to the states. So in addition to making sure that a gift card issuer has a compliant gift card program (to avoid civil fines and penalties, and to avoid potential criminal liability for fraud), issuers must also contend with the fact that states may come after them for unused, outstanding balances on their gift cards.

In conclusion, a hotel company branded gift card program – when properly implemented – can provide a boost to sales for hotel chains in these difficult economic times. However, because of the very fragmented legal framework that currently exists in this area, it is important to consider many of the issues described in this article both with respect to existing programs and in the implementation of new programs. While helped somewhat by the Card Act, the potential pitfalls still remain because of the confusing preemption provisions created by the Card Act which ultimately require a full review of state's gift card laws.

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